Padel: Causing a Racket - [Business Breakdowns, EP.127]

25:15And fortunately, based on the prevailing cost to install and margins, it seems like a great opportunity still. So let's go into that piece of it. I guess the major cost is upfront building the thing, and then you're paying employees. So what does the margin profile of a club look like in general? And then I guess, in addition to that, what's the payback period if you're spending, say, a million bucks upfront to build the club? We're projecting typical margins of about 35 % to the bottom line, which is fairly attractive. So it's a two to three year payback on average. Now there is a ramp up period depending at the moment.

25:57There's certainly a ramp up period as you get players in and you teach them the sport and you get the word out and your social media kicks in. There's going to be more expenses as a startup because you're hiring more coaches. You're getting more people and you're showing them how to play. You're creating more in -house tournaments to get people to play with different people at their level. So there are some startup costs. But in general, we're projecting roughly a 35 % margin. I think some people will actually generate higher than that, depending on the model. The payback could be quicker, which provides an opportunity to reinvest and expand.

26:30And there will be folks that will have maybe a lower margin, but maybe a higher price point, for example. So this will move around a bit. But again, it's an attractive investment thesis at the moment. And it's really a growth story. This is really a consumer growth category. And so it's in the sports world. Again, I would say there's this hospitality component to it because people need to know how to run a club and make it welcoming. But in terms of businesses that are mature, this is an attractive proposition. Just to bring that to life a little bit more, when you look across the consumer landscape in terms of other comparisons, maybe not in the sporting world, what sort of business profile are you comparing this to?

27:12And potentially, Is it gyms? Is it restaurants? Is it country clubs? I think the best comparison is still gyms. And whether it be an Equinox type experience or a Planet Fitness or LA Fitness, we don't think it's exactly... Interestingly, it's not analogous exactly to tennis clubs. We've had a lot of people who are tennis club operators and have come to us and given us their opinions. And the way that tennis clubs generate revenue... I'm not an expert in tennis clubs, so there are probably people listening that know more about this than I do. But we find that there are different revenue sources where tennis clubs are maybe more driven towards clinics.

27:52More of the revenue from a paddle club is actually from the court time. So lessons make up a much smaller percentage. People take lessons to get started. They get to know it. And then maybe it's a lesson once in a while just to catch up. But it's really about getting on the court and playing. and playing as often as possible and playing with your friends and getting out. So it has a different feel than other sports. If people are going to a health club, they're typically going three times a week, maybe, if they're really into it. Maybe it's less or maybe it's more, but there is this idea of going back.

28:25Now, you don't pay every time you go to a health club. It's definitely more of a subscription model, which is a little more sticky. So it's not exactly analogous to that either. but it's some combination there where you're attracting people based on their wanting to get out often. I hear complaints that people learn to play and they can only get courts once a week, or they can't even get courts once a week right now. And it's frustrating. So the industry is very keen to get more courts so people can come and play. Yeah. And I guess it's worth underlining as well, the scale of the court versus tennis court that you just referenced there in terms of tennis clubs, you can fit probably two or three paddle courts on the same footprint as one tennis court.

29:09And so you can fit a lot more of these in. But you just mentioned as well, the supply issue. How is that resolved? Is it by just incentivizing entrepreneurs to build more clubs? Or is it a town planning issue? What's the bottleneck and how does that get resolved? Here in the US, it's happening. It's going to take another year before there's really enough places to play to really meet the initial demand. Depends on what part of the country you're In Miami, there are places to play. There's quite a bit more in the works. In Florida, in general, in Tampa as well, in Orlando. And it's just more well -known there.

29:39It was really the first point of entry in the United States. Houston has places to play. Texas is, again, a little bit at the forefront. New York is relatively new. And it's really yet to really take off on the West Coast, except San Diego. San Diego has had a facility for a couple of years now that has been very successful. The Taktika people have done well with that, and they're expanding rapidly. In different countries, this has evolved differently. In Sweden, this took off really quickly because it's relatively easy to build courts. And that was both good and bad. A lot of folks point to Sweden as both a huge success, but also some pitfalls because it grew really rapidly.

30:19They were able to put a lot of courts in very quickly because the land use is easier to build. In Germany, it's been much more difficult to build and it's taken off much more slowly. but of course the courts that are built do well because there's not as much supply and the u .s is probably more like the latter land use is more difficult here and depends on where you are but certainly in california it's very difficult to build anything and the existing warehouses where they could fit there's huge demand for warehouse space warehouse space is incredibly low vacancy but that will change. And I have heard from friends I know in the real estate business who've called me and said, Hey, I'm getting calls from Padel operators.

31:04And I don't know anything about this. And I've seen, you know, I know you're doing this and this is interesting. What's going on. Tell me about this. I say, look, it's for real. If you want a good long -term tenant and you're interested in a different use, especially if you're in a location with a lot of residences and the demographics are right, your economics are going to be phenomenal. You can definitely get premium economics for this and you should jump all over it. It's an opportunity. And I'm sure there's paddle operators that would even be willing to consider some equity swaps. I'm sure there's a lot of financial arrangements that people could figure out for startups that would be attractive to owners of the space.

31:42But it's going to take a while. Both the land owners and the property owners are still getting used to it. They're still understanding it. And there's not a lot of that space where people live. The ceiling height is also a critical component. Typically, different people have different opinions, but let's just say 24 feet is probably minimum. And you can get by with lower, but generally you want a little bit higher. And so what goes into that then? If you have a lower ceiling, do you need to raise the roof, which is doable in some cases, and people are doing that? Do you keep searching for the spots?

32:20Do you go indoors or outdoors? In certain climates, you can stay outdoors, which is a little easier to find land. What will happen though, is that there will be a benefit in that this won't grow so rapidly, so fast that we overbuild. And I think that's a key differentiator here in the US and other markets too, whether it's, I think the UK is somewhat similar. Again, I mentioned Germany. Italy has been easier to build. The sport's taken off rapidly. Spain has been easier to build. It's taken off rapidly. Sweden has taken off. So when people can build, they fill up, but the economics change because then there's more competition.

32:56And so we, again, view this as an early stage opportunity because we want to be at this stage of the curve at this point. Yeah, super interesting. And I have to imagine as the sport matures and you start moving down into the lower income brackets, then obviously the margins will get compressed as well. So all that seems to make sense to me. In terms of the rest of the ecosystem, we mentioned the pro league earlier, which either invested in one of the teams there. I'm curious about just the general ecosystem, what else there is most sports as a child. And particularly you get into it because you're watching your favorite players on TV and then you want to go and replicate them.

33:34So you go and play and learn, etc. etc. What does the pro league at the moment look like both in the US and around the world? It doesn't seem to be a huge source of demand among the general populace to go and play this sport. But what does that look like now? And how might that change? The pro paddle league was formed earlier this year and a little bit on the premise that Americans love teams and they love their homegrown sports. So the rest of the world has had the enjoyment of the world paddle tour, the premier paddle tour for a number of years for quite a while actually. And those have been hugely successful.

34:08And they're really a media property to some extent. One of the things we really like about the sport is the media opportunities. I'll come back to the Pro Paddle League. We were approached early in our endeavors by media group here in LA that was interested in the sport. Obviously, pickleball has done really well with ESPN and their media rights. But the belief is that paddle is a hugely fun sport to watch on a screen and that it's highly attractive, that there's a lot of opportunity. It's very early and people are trying to figure out how to monetize that and how to get more paddle on screens, but it will happen.

34:47My first experience with it was I went down to a premier paddle tour in Monterrey, Mexico to watch the event. I had not been to a tournament previously and it was exciting to watch in person. It was huge fun. And I had texted my family and said, Hey, you might want to check this out on YouTube. And we spent the next hour and a half texting back and forth on our phones about the plays and what was happening. And my family was super excited and they were really thrilled with it. So touching on other opportunities, we think that this is a really fun sport to watch. Obviously, tennis is really well established as a media sport and has great viewership and contracts and so forth around the world.

35:26And we think that Padel, as it takes off, will have some of the same opportunities. The media opportunity was partly what led us to invest in a team here in Los Angeles. We own the Los Angeles Beat, which is a team within the Pro Paddle League. And we think there's a huge opportunity, again, for a fan base to bring the sport here to Los Angeles and to create a brand around that and to market it and create an American experience, actually. It's an international sport, but we think there will be some unique American twists and turns given the market here for existing sports. And I want to go into the league specifically, but just a quick question in terms of why it's an attractive media asset.

36:08What is it particularly about the sport that makes it interesting or good to watch on TV? Because I guess you have tennis, which is a popular sport that people like to watch on TV, but then you have squash, which has never really found its market. Maybe it's the ball's too small and too difficult to find, to see because it moves too quickly. Are there specific attributes that make this particularly interesting? I think so. There are some things that are interesting. First of all, it's a glass court, so you can really see the play clearly. But I think more than that, it's the athleticism of the players.

36:38The players are running back to the wall, back to the glass rather, up to the net. If the ball is, they can smash the ball out of the court, which is exciting when it happens. If there's a volley back and forth and there's, they're going back and forth five times and then someone smashes it out of the court, it wins the match or wins the point or wins the game. It's thrilling. It's exciting. It's unlike tennis in that sense. It's if the ball is smashed out of the court, the players can actually run out of the court and hit the ball back into the court. And the first time you see it, you can't believe that any athlete can possibly do that.

37:10But these athletes, they're amazing. They can move and they have reaction time that is when the ball is coming at them, they react and they get the ball to the other side. And it almost looks not human. It almost looks these people are super human. It's really fun to watch when the matches keep going. And especially I watched a lot of teams this spring when the inaugural season of the pro paddle league took place. And I watched some of it here at home on the TV. It was a blast. I spent many Saturday mornings and Sunday mornings watching games for three hours. I'm not generally a TV person or stay -at -home person living in Southern California with a lot to do, but I did and it was fun.

37:51It's an experience that is really great to watch. So it's exciting for fans. These athletes are really something. These professional athletes that are doing this are incredible. So the Pro Paddle League in particular, so it started last year. What does the schedule look like? And have you got teams all across the US or is it concentrated at the moment in one particular part of the country? Just talk me through some of the dynamics there. This was our inaugural season. We were actually the first team to sign up with the Pro Paddle League. We wanted Los Angeles to do the market size and so forth.

38:22And then pretty quickly, there were a total of seven teams. So there was San Diego, Miami, Toronto, Arkansas, Cancun, and Las Vegas, I believe. So we had a tournament with seven teams and we did that in between May and June of this year. So we really just played each team once. We did a tournament style in Tampa to get it started and work out some of the kinks and understand it. So we did that. Now we're in our planning for our next season. We'll probably have a grouping of East Coast teams and West Coast. We currently have a total of 10 teams. We've added New York and Houston and Orlando. Daddy Yankee actually bought the Orlando team, which was huge for the league and huge for the sport.

39:08And we expect to have some East and West tournaments that then the top teams from each division will then play in a championship. And we're working out the exact timing and the format. This is still an early, early part of the sport. And we think the opportunity is huge, but we don't want to grow too fast. So I don't know if the plans are exactly to have maybe 12 teams or 14 teams, but the goal is to not overwhelm with a lot of teams too quickly and to grow this very thoughtfully. These might be some very stupid questions, But is a team simply two players? Or do you have a men's doubles pair, a female doubles pair, a mixed?

39:51What does that look like just from the very basic level? The game is actually played with two women playing two women on the other team, and then two men playing two men. So you need at least four players to really have the team. And then the last season was set up where if we won both games, then we won the match. We get the win. If we tie 1 -1, then there's a tiebreaker of mixed doubles, one man, one woman playing one man, one woman. And then the winner of that match then determines who wins that game. I don't know exactly if that's the format going forward, but I will say when you're watching the sport, this is a sport that is very attractive for women players.

40:40And we think that it's very exciting, both the men and the women. We're really excited about the opportunity to be a mixed gender team, a mixed gender sport. And we think that's part of the appeal of this going forward. And it's been fun to watch that and see that and see the growth of that. I'm fascinated just generally about how you start Sports League and go from zero to one and 100. And you talked about not wanting to grow too quickly. What's on the strategic priority list of things that you do want to do? Do you have a media partner at the moment? And what other things do you think about as you develop the league?

41:18I'm not involved with the management of the league. So I'm going to be somewhat limited to speak here. It's like a startup, really have to run it like a startup. And you really have to think about what are your revenue pillars and what are your brand pillars? So in this case, the revenue pillars in the long term are really media, sponsorship, and people coming in person. And we know the people coming in person is going to take a little while because we need to get the players. Now, if we were in Spain or we were in Sweden, I don't think that would be a problem. Argentina, we'd have no problem.

41:45Again, when I was in Mexico at the premier paddle tour, the stands were full. It was not a problem to get people, but it's still new here. So at the moment, we need to build the fan base. We need the people that can attend in person. But fortunately, to some extent, the sponsorships are already happening because a lot of international brands are aware of the potential and they see the opportunity. Just like my partners in Sweden said, let's say, let's start this in the United States because of what we think is a very early stage opportunity. They're seeing the exact same thing. So they're putting money into the US.

42:18They're putting effort here. So sponsorship, and then last thing I said was media. And the media is still evolving, obviously. And I don't know the latest in terms of where we will appear. This past season, we were on CBS Sports, and we were also on YouTube. And that was rebroadcast in different local markets in different ways. So we'll see where that goes for next season. That's always something we're working on. But we're not too concerned about it. If we put on the right product and we deliver the right experience for people, we're confident that we'll get there. But it is a startup. And it means starting from scratch with the marketing, the branding.

42:56when we started the team, we were the first team to put down our reservation, if you will, or our affiliation agreement. And then we waited for confirmation that the other teams had signed up. There was a gap there for a couple of weeks. And so we got the notice that, okay, we have seven teams, we're going to kick out this league. So we literally dropped everything we were doing for two weeks and we worked on our branding, which was probably one of the most exciting times in business that I've had because we knew we had to get everything done very quickly. so we could get our website built and we could get our uniforms ordered.

43:28And it was fun. It was exciting. We're proud of the work we did to get that done quickly and get it out there. And what color did you go with? We went with a blue primary and yellow background, yellow lettering. We picked the colors in part because a lot of the California teams that are already existing already have yellow and blue in their scheme. and we thought it was a great way to represent the tradition of sports in California and build a fan base with that. And we actually chose a name. So we chose Los Angeles beat, which was interesting because we didn't go for the traditional animal or something else that a lot of teams.

44:05We went for something that we thought would have youth appeal would be a little more, to use a phrase, maybe street than traditional tennis. We wanted to go for something that was a little hipper and younger and youthful. Another reason was the longstanding music groups from LA. We thought it was a great representation of one of the core industries in LA that has resonance across the globe. And we thought that would be a great thing for the team to represent. Makes a lot of sense. And actually gets into a question that I want to ask about how paddle as a sport just grows. It's obviously been on tremendous growth rate recently.

44:40What does it need to keep growing and get even bigger from where it is today in terms of the growth rate itself? What are the big markers that you look for the sport as a whole to get through on the path that you'd like to see it go? One of the things I love about our investment is that we're not completely dependent on mass adoption of the sport. One of the things that in the US that's very different, I think, than other parts of the world is just the variety of things that people do here. Especially I'm in Southern California. And so between professional sports teams that are already established and then other activities, whether it even be in my community, mountain biking and surfing, and there's so many things to do here.

45:25So it doesn't even need to be what pickleball is, quite honestly. But what we are looking for is an adoption that creates enough players so that the players playing feel like there's a variety of people they're playing against. They can bring their friends. If they're not tennis players, they can still pick it up. We think there's a huge opportunity to carve out a niche, even in a crowded space. I think that paddle, it's so much fun to play. It's literally addictive. Once you play a few times, it gets in your brain and you want to go back and you want to play again, you're looking for locations.

46:00The key is to have something close enough to home so that you're not driving half an hour or driving an hour or not on a subway forever. You need enough locations nearby so that it's a little more convenient. And I think that'll happen. So I think the mass adoption piece of it, what we need is enough courts close to people where they live that we can get a big enough crowd. I think the rest takes care of itself because it's so much fun to play. I guess there is some element where you need brand recognition of the sport in general. You talked about tenants who are unsure of potential paddle occupants.

46:35And I guess if you can solve educating the general population on paddle as a whole will make some of those challenges easier and allow you to be able to build courts near people's homes. One of the things that I see keep popping up is the Olympics as the flagship. If you would say paddle is an Olympic sport, then that very quickly settles maybe the question for landlords and say, yep, this is a real thing. Is that on either your radar or the sports radar? And how close is it to potentially becoming an Olympic sport? Well, certainly people are working on it. There is an international paddle federation that has organizations in every country, which is one of the criteria that there's an organizing body that can push the sport.

47:13In the United States, it's the USPA, the United States Paddle Association. And there's organizations around the world doing the exact same thing. So they're active. It will not be in the 2028 Olympics in Los Angeles. Sadly for me, disappointed by that, but there's not enough time to get it there. So I think right now the focus is maybe on 2032, which I believe is in Brisbane. We'll see. Again, if you're in certain countries around the world, you would be amazed that it's not in the Olympics because it's so popular. And we know we work with these professional athletes that it would be exciting to see them in the Olympics.

47:49There's players that have been playing since they were youth that are phenomenal and watching the sport. I think if it was an Olympic sport, I think the TV coverage would be there. The media coverage would be there because it's so much fun to watch. Again, maybe not as many people the first year know about it, but I think it would have viewership that would take off. So we're hopeful that it could be announced for 2032. So we'll have to see about that. I'd learned a bit about the Olympic process of getting new sports into the Olympics. There seem to be five criteria and it meets four at the moment.

48:21There is one criteria that says the sport needs to be competed in 75 countries over four continents for men and 40 countries over three continents for women. And so as the sport grows, hopefully we'll tick that box and then there'll be even less resistance to it potentially becoming an Olympic sport, which will be very interesting to see. On the flip side of the opportunities coin, we like to talk about the risks and particularly, I guess you've talked about how maybe this isn't so much a general paddle story for you as an investor. It's how they're slightly more idiosyncratic. So when you think about your investments and your portfolio in the sport, what do you see as the risk?

48:53What keeps you up at night as you think about those things? Well, certainly the risks are, again, in a crowded real estate market that there's a lot of things for people to do. There's just not enough courts right now. And then the business will take longer to build out as a result. We We definitely see that we need to get quartz going. Of course, that's also the flip side of not so much supply that it hurts the economics of this business. While we're not worried about overbuilding, certainly there could be price pressure at some point. I think down the road, go out five years from now, you could see price pressure.

49:30You could see that there's enough quartz or that the paddle centers need to reduce prices. That completely could happen. We think about this as like a curve. We're at the very, very, very beginning of the curve, comes up and then it plateaus a little bit, maybe declines slightly at some point in the future. Those are all things that we plan for and we think about and how we invest. And when we look at new investments, we underwrite them not as aggressively typically as the companies do. We look at downside scenarios and we look at if the revenue dips or let's say there's a period of time where for some reason something has to close.

50:07What happens if there's a three -month closure for some reason? Now we look at all those risks and we evaluate them. I think the thesis is still pretty strong. So at the moment, it's more of speed to market. The real risk is who's first and who gets the best locations and who can get the right brand. What entrepreneurs can execute? It's great to plan. Everyone, maybe people have played in their home country or now they're expats living here and they want to start a business. and great planning, great connections, but can they execute? So those are just typical everyday business risks that we evaluate pretty rigorously and when we're looking at investments.

50:47And again, just considering the longer term. There are other examples like squash. I think you brought it up earlier. Why did squash not take off in the same way? And I think there's some pretty interesting, both comparisons and then some pretty important differences. And there are other sports too that maybe people thought was the next big thing that maybe has plateaued or just didn't get quite the same reaction. The big difference is when you walk into a paddle center, let's say you go into Padel House in New York and you look around, there's four paddle courts and you can see friends that might be playing in one court and you can see what's happening.

51:20And you go on your court and maybe you stop play for a minute to go watch someone else and you're meeting in the hallways and it's a little different. I remember from my college days playing squash where you go down to kind of a dark hallway and you go in a room and you're playing one -on -one and you're by yourself. It was not social. It was super fun, but it wasn't social. And when you play padel, it's social. That's why people play pickleball. Pickleball is a great way to get your body moving, get outdoors and see your friends. Paddle has all of that with an amped up athleticism for those that want it.

51:54We look at all of that. We look at all of the potential risks. I come from a banking background most of my career and commercial real estate. And so risk management is in my blood. And I think about that. And we evaluate that backwards and forwards. We always end these discussions with the same question, which is about lessons. And I'm particularly interested in your answer here, given your career in banking and real estate and your recent fray into paddle and venture style investing. What have you learned through this experience and just working in this new sector that you can either share with investors or operators out there?

52:28I think the biggest thing that we have learned is, again, our due diligence process. And I think when evaluating a new business of any sort, coming up with a set of criteria that you will use to move forward or not move forward is key. And we've come up with a set of 10 operating criteria that we use where we don't need every single box to be checked, but we need a significant number of them to be checked before we move forward. I think that's any investment, there's a gut feel. So you have to feel good about it. You have to feel, hey, this is something that's important, but then you have to go through the rigorous process.

53:12I also think it's really important that if you believe in something, if you see an opportunity out there, if something is really grabbing you, where you know something about an industry that maybe others don't know, and you feel like there's an opportunity, go for it and pursue it and see where it goes. But also, don't be afraid to change. Don't be afraid to adjust course while you're at it, because you learn things along the way that you don't necessarily know, or you thought you knew, but then maybe someone else knows more. When we first started working on this project, we thought we had a model based on what was going on in Sweden and Spain, and we knew we had to adapt it to the US.

53:50And I had a background in commercial real estate as well. And so felt that we had a lot of ideas about how we could structure this. We learned as much from some of the companies we were investing in who helped us understand where the market was, where the legal structure should be, where we should pursue some of these opportunities. And then we learned what some of the opportunities we shouldn't pursue, which we thought would be great businesses, but maybe we just couldn't understand where we were going to make money at it in the long run. there's been super interesting breakdown of a new exciting fast -growing sport delighted that you could join us to explain more about the sport and how you're investing in it and behind it very excited to see where it goes thank you so much for your time thanks for having me this was really fun i appreciate the ability to do this to find more episodes of breakdowns ranging from costco to visa to moderna or to sign up for our weekly summary check out join colossus .com That's J -O -I -N -C -O -L -O -S -S -U -S dot com.